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McDonald's Seeks a Chinese Fortune

The fast-food giant aims for more Golden Arches in the East.

Relations between the U.S. and China could be entering the realm of "interesting times," but McDonald's(NYSE: MCD) seems undaunted. The fast-food giant recently announced plans to nearly double the number of Golden Arches locations in that highly coveted market.

It comes as no surprise that American companies yearn for heated expansion in this populous nation. China has more than 1.3 billion people; one in five people on the planet live in China. That's a lot of people who might want fries with that.

Meanwhile, informal dining out in China is currently a $300 billion opportunity, and it's expected to increase by 10% this year as the middle class in that country grows.

An aggressive growth target for Chinese restaurants certainly looks like a good idea, given McDonald's 2010 plans to grow global revenue by 3% to 5%, and profit by 7% to 9%. In fact, China is the company's fastest-growing market in sales and income.

Step it up, Ronald!As it stands now, China has 1,100 Mickey D's. By the end of 2013, McDonald's plans to have planted 2,000 in the nation. China already represents 23% of revenue from the fast food giant's Asia Pacific/Middle East/Africa segment.

Let's look at McDonald's comparable-store sales by geographic region for the last several years (in constant currencies):

MCD annual comparable-store sales

2009

2008

2007

Asia Pacific/Middle East/Africa

3.4%

9%

10.6%

U.S.

2.6%

4%

4.5%

Europe

5.2%

8.5%

7.6%

*From company press releases and SEC filings.

As you can see, in 2009 comps slowed down across the board, although admittedly, McDonald's faced tough comparisons in years past.

Opportunity and riskInvestors understandably get excited about U.S. companies that eye Chinese growth; one of the significant factors for the investment thesis for Yum! Brands(NYSE: YUM) has been its presence in China, and its continued aggressive expansion. Last year alone, it opened more than 500 new restaurants there. Yum! has more than 2,870 KFC outlets in China, and more than 450 Pizza Huts. You can see why McDonald's would be salivating to compete for some of that action.

Of course, expanding into China is not without pitfalls. Although Starbucks(Nasdaq: SBUX) is still waxing enthusiastic about its Chinese locations, it's faced plenty of frustrating moments, including its 2007 retreat from the Forbidden City. Many U.S. companies have also had to navigate difficulties with the Chinese government and its policies, including Yahoo!(Nasdaq: YHOO) and more recently Google(Nasdaq: GOOG).

Last but not least, rumblings about the possibility of a trade war between the U.S. and China seem like good reason for investors to temper their enthusiasm for U.S. corporate expansions in that country. If the tariffs start flying, intercontinental commerce could get dicey.

Good fortune for McDonald's shareholders ahead?Regardless, McDonald's remains one of my favorite stock ideas, given its impressive growth and performance over recent years, its leadership role in the fast-food space, the fact that it's a steady dividend payer, and its ability to attract consumers in good times and bad. Though I recently wondered whether investors should wait for a cheaper entry price, Mickey D's is still a dependable, high-quality stock for a solid portfolio.

The promise of torrid growth from Chinese expansion is extremely appealing. Crack open this fortune cookie, and you'll see that successful future growth in China could make McDonald's far more of a bargain than we realize now.

What do you think of McDonald's plans? Let us know in the comments boxes below.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax